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By Vinay Bhaskara

Since de-regulation, few airlines have been more acutely tied to leisure traffic than low cost carrier . Long known as the domain of families visiting each other up and down the east coast, and of tourists flying out of secondary airports to take advantage of extremely low fares, Southwest’s steady rise until the mid-2000s was most visibly focused on growing its leisure traffic.

But since that point, Southwest has made a sharp change in direction, evolving its simple, no-frills business model targeted at leisure customers and independent small business travelers into a more complex hybrid product with a focus on growing Southwest’s share of corporate travel from Fortune 2000 companies.

Tailoring the product to the corporate customer

In recent years, Southwest has developed several tools and product evolutions to tailor its product more to business travelers. The major ones include -

Business Select, which allows passengers early boarding, priority check in and security lanes, a premium drink, and twice as many Rapid Rewards points per dollar spent.

Early Bird Check In, which automatically checks passengers in, and gives them a better boarding position with earlier access to overhead bins

According to CEO Gary Kelly Southwest does “6% or 7% of our boardings by Business Select, [and] probably more than double that by EarlyBird.” And the combined direct revenues from the program were nearly $295 million in 2013.

Furthermore, Southwest has:

Rapid Rewards, a frequent flyer program that is revenue based for both earnings and redemption, with guaranteed access to inventory for redemption.

And, SWABiz, a direct access corporate booking engine which also includes a tool to manage company meetings as well as tools to monitor air travel, hotel, and car rental spend for corporations.

Southwest also has a product that appeals to certain business travelers in terms of its lack of checked baggage fees, WiFi and LiveTV provided by DISH on board, and easier change fee process.

The combination of these factors has led to “double-digit growth” year-after-year in managed corporate bookings according to Southwest’s Chief Operating Officer Robert Jordan, who adds, “[O]ur [Southwest’s] corporate business is growing faster than our base business.”

Turning to Business Customers to offset rising costs

The reason Southwest Airlines has turned increasingly to business traffic is rooted in its cost structure. For much of the last two decades of the 20th century, Southwest was growing at a rapid pace. When an airline is growing rapidly it can offset cost increases on its existing network by spreading fixed costs across more flights aircraft and destinations. But by the mid-2000s, that growth had largely tapered off. Lower per-gallon fuel prices thanks to smart hedging of oil allowed Southwest to continue to offer extremely low fares between 2003 and 2008 even as its capacity growth slowed. But today Southwest pays market price for fuel, and its revenues have had to increase accordingly. Furthermore Southwest is noted for its strong management-labor relations, which has positive and negative impacts. On the one hand this strategy minimizes the risk of labor strife and increases employee satisfaction, which Southwest believes has a positive impact on service and the travel experience. On the flipside, it also pushes Southwest’s labor costs up as employee groups have come to expect raises every time new contracts are negotiated. When Southwest was growing, or when it could offset labor cost increases with the extraordinary advantage of its fuel costs, this labor relations strategy that dates back to founder Herb Kelleher appeared to pay off. But over the last five years it has grown into perhaps the most significant cost challenge that the carrier faces.

These two factors created an environment where Southwest almost had to go after an increased share of high yield business travelers, and increase revenues from its existing business customer base. And date from the US Department of Transportation (DOT), as flawed as it is, support this analysis. Since 2007, Southwest’s air fares are up 20% adjusted for inflation and stage length. Between 2003 and 2008, Southwest’s per gallon fuel cost was, on average, 19.8% below the industry average. Since 2008, it has been, on average, 5.1% higher than the industry average. And since 2007, its labor cost per available seat mile has risen 21.0% adjusted for stage length and inflation.